Wednesday, November 21, 2007

I guess Stephen Feinberg has finally gotten tired of being United Rentals' punching bag. Yesterday he sent his attack puppy Mark Neporent to disabuseThe Wall Street Journal of the "outrageous spin and misinformation" being bandied about by spurned buyout target URI over their disputed merger agreement. The article recaps the issue at hand:

At the heart of the dispute is another arcane M&A term that has taken new meaning as the credit crunch turns the deal world on its head. This one is called “specific performance,” and refers to the ability of a seller to force a buyer to complete an agreed-to buyout.

Cerberus points to a line in the merger agreement that says, in part: “In no event…shall [Cerberus or affiliates] be subject to any liability in excess of the” $100 million breakup fee. People in the URI camp say that interpretation ignores the specific-performance language in the same document that a judge will also take into account and which they say will force Cerberus to go forward with the deal.

Neporent is certainly correct in saying that the merger document seems to limit Cerberus' liability for damages strictly to the breakup fee. The "line" (rather sentence) in question at the end of Section 8.2 of the agreement says the following [annotations mine]:

In no event, whether or not this Agreement has been terminated pursuant to any provision hereof, shall Parent, Merger Sub, Guarantor or the Parent Related Parties [Cerberus and its homies], either individually or in the aggregate, be subject to any liability in excess of the Parent Termination Fee [100 million spondulics] for any or all losses or damages relating to or arising out of this Agreement or the transactions contemplated by this Agreement, including breaches by Parent or Merger Sub of any representations, warranties, covenants or agreements contained in this Agreement, and in no event shall the Company seek equitable relief or seek to recover any money damages in excess of such amount from Parent, Merger Sub, Guarantor or any Parent Related Party or any of their respective Representatives [most especially Stephen A. Feinberg].

But Mr. Neporent slips into spin mode himself when he continues.

Referring to the shell company Cerberus created to buy United Rentals, Neporent adds: “RAM negotiated an agreement that allows it to pay $100 million to walk away, unconditionally and under any circumstances. RAM has lived up to the contract it negotiated.”

Uh, no, that's not how I read it. In order to pay $100 million and walk away, Cerberus has to formally terminate the agreement. But it cannot unilaterally terminate the agreement at whim. Its ability to do so is strictly limited to the occurrence of specific conditions, including, principally, a material adverse effect in URI's business. Cerberus has not claimed an MAE or any other termination condition has occurred. Of its own volition, it remains a party to the signed agreement. It simply claims that its liability under any circumstances is limited to the breakup fee, whether the agreement terminates or no.

* * *

So what is this "specific performance" schtick that URI is flogging in the Delaware Chancery Court anyway?

I will risk alienating the three corporate lawyers left in my audience who are too lazy to have cancelled their subscriptions by wading into the debate with a few well-chosen observations. Lacking the pedigree or training of an accredited legal education, I will of course turn to that font of all legal scholarship, Wikipedia. It says the following about specific performance:

In the law of remedies, an order of specific performance is an order of the court which requires a party to perform a specific act. While specific performance can be in the form of any type of forced action, it is usually used to complete a previously established transaction, thus being the most effective remedy in protecting the expectation interest of the innocent party to a contract. ...

Under the common law, specific performance was not a remedy, with the rights of a litigant being limited to the collection of damages. However, the courts of equity developed the remedy of specific performance as damages often could not adequately compensate someone for the inability to own a particular piece of real property, land being regarded as unique. Specific performance is often guaranteed through the remedy of a writ of possession, giving the plaintiff the right to take possession of the property in dispute. However, in the case of personal performance contracts, it may also be ensured through the threat of proceedings for contempt of court.

Orders of specific performance are granted when damages are not an adequate remedy, and in some specific cases such as land sale. Such orders are discretionary, as with all equitable remedies, so the availability of this remedy will depend on whether it is appropriate in the circumstances of the case.

Given that URI and its shareholders are probably facing the erasure of a couple billion dollars of market capitalization for the foreseeable future if Cerberus walks, it does appear to Your Dedicated Correspondent that URI can argue a $100 million goodbye kiss is not an "adequate remedy" for damages suffered.

There are some circumstances where specific performance is usually not granted. Wikipedia lists them as:

specific performance would cause severe hardship to the defendant

the contract was unconscionable

the claimant has misbehaved (no clean hands)

specific performance is impossible

performance consists of a personal service

the contract is too vague

Because Mr. Neporent boasts to the Journal that Cerberus has $10 billion of ready liquidity, it does not appear credible that buying URI for $7 billion would be a severe hardship. Neither is it apparent to a disinterested observer that any of the other conditions apply in this case. Chalk another one up for URI.

On the other hand, it is not obvious to me as a layman that what Cerberus has to deliver under the contract—seven billion dollars, more or less—is really that unique and irreplaceable. (I could see Cerberus bringing a claim of specific performance against URI if the tables were turned, since URI itself is arguably a unique collection of assets which Cerberus could not obtain elsewhere.) Why can't Cerberus argue that URI is not permanently harmed because it can simply go back out and find someone else to buy the company if it really wants to sell? Sure, the selling price may be lower, but dems da breaks, no? Notwithstanding the fact that the credit markets still seem to be suffering from a collective case of the vapors, there remain quite a few strategic and financial buyers out there with plenty of the folding, and the last time I looked the dollar was still a fungible, if depreciating, currency. Add a tally to the Cerberus column.

And yet, Cerberus has presumably triggered this dispute by getting cold feet about the price it agreed to pay for URI. It has not claimed that a material adverse effect has occurred, and a cursory reading of the conditions under which either party can terminate the merger agreement (Section 8.1) seems to indicate that Cerberus indeed has no cause to terminate the deal unilaterally. (If it did, it could pay the reverse breakup fee and walk away. URI would have no remedy but to pound sand and plant unflattering rumors about Feinberg in Vanity Fair.) Therefore, the merger agreement is still in force, and presumably Cerberus is still subject to all of its obligations thereunder, including the non-trivial one of delivering a suitcase full of 7 billion simoleons to the closing ceremony. It cannot terminate, and the company will not terminate. What does signing a contract mean if you can just sit back passively and refuse to deliver your side of the bargain? Forget about specific performance; what about simple performance?

Since URI seems to have limited its ability to collect liquidated damages from Cerberus to the $100 million breakup fee, I guess its only option is to get the Chancery Court to enforce the merger as agreed. Hence, I presume, its approach based on specific performance. Since the facts do not appear to be in dispute, and the language of the contract does not seem to be unclear, the outcome will presumably come down to a question of law. Will the court compel Cerberus to perform under a contract which it has not chosen to (and apparently cannot) repudiate, or will it tell URI that—tough cookies—it waived its ability to collect more than $100 million from Cerberus under any circumstances other than the closing of the merger? Stay tuned for the answer.

(Oh, and you're welcome for the cut-rate legal education. Send your checks for $1,000 each made out to the TED Legal Defense Fund, care of Stephen Feinberg, 299 Park Avenue, New York, NY 10171. We also accept euros, pounds sterling, and Canadian loonies, but only at last year's exchange rates. Pip-pip.)

* * *

UPDATE: A colleague of mine with even less legal education (and therefore substantially greater clarity of thought) than me points out that one can indeed read the critical language in Section 8.2 above as limiting Cerberus' liability to the breakup fee even if it intentionally breaches or repudiates any or all provisions of the merger agreement, including the obligation to close. If so—which I presume is the interpretation Cerberus itself intended and sought by negotiating it into the document—that would be a new one to me. Sort of like a "Nyah, Nyah, Just Kidding" clause, or a "Contract? This Ain't No Stinking Contract" provision. If it stands in court, and URI actually agreed to give Cerberus a $100 million Get Out of Jail Free card for a $7 billion acquisition, I think it should be enshrined in the annals of contract law as the United Rentals, Inc. Dumbshit of the Century Clause. I would fully expect that none of us will ever see it a second time.

Any time any of you clever legal eagles out there would like to weigh in on the subject and illuminate me, feel free to drop me a line. I'm scratching my head so hard my hair is beginning to fall out.

FINAL UPDATE: For those of you looking for more informed speculation on this little brouhaha, and with time to spare over the long weekend, you could do far worse than to start here at the M&A Law Prof Blog. My interpretation: things don't look so good for URI.

Monday, November 19, 2007

United Rentals, Inc. filed a lawsuit today in the Delaware Chancery Court to compel Cerberus Capital Management to go through with its agreed $34.50 per share take-private of the company. The $7 billion planned wedding began to look a little shaky last Wednesday, when Reuters began running stories hinting that Cerberus was getting cold feet and might walk away from the deal.

It turns out that the prospective groom delivered a "Dear Sally" letter to URI that very day, explaining that he just wasn't ready for marriage, but was willing to try a little experimental cohabitation (at a lower price) instead. If URI did not agree, Cerberus made it clear he was ready to send a really nice box of chocolates (and $100 million wrapped up in a bow) as a farewell present, "no hard feelings."

Apparently the would-be bride, surrounded by hundreds of wedding reception centerpieces, custom printed cocktail napkins, and a two-hundred pound melting ice sculpture of Rodin's The Kiss, took the letter a little poorly. For one thing, the wedding itself was only days away, and for another Mrs. Cerberus-to-be was distinctly in a family way, pregnant with a full-term bouncing baby LBO. News that Cerberus might pull out of the deal sent her social standing plunging over 30% on the New York social circuit and almost guaranteed her little darlings would never get into Greenwich Country Day School. It did not help matters that she suspected Cerberus himself or his college drinking buddies were the scallywags who leaked the embarrassing news to the press.

So, being one of those modern gals who do for themselves, URI broke out the shotgun and the high priced lawyers and decided to "learn" Mr. C. just who it is that wears the pants in her family. From the evidence of her opening salvo, it looks like she's planning a long and nasty fight. Knowing that her former paramour Stephen Feinberg is of an excessively shy and retiring disposition, she made sure to identify him by name in the very first sentence of the press release accompanying the filing of the complaint today. If I were a betting man, I would lay even money on the fact that we can expect to see copious mentions of Mr. Feinberg and his associates in frequent press releases published by the company from now on. After all, URI is a public figure, so she is naturally obligated to share all important developments with her legions of friends and family on a regular basis. I wonder how Mr. C. will hold up under the pressure.

What is more interesting to me, however, is how old Steve got himself in such a predicament in the first place. According to URI's complaint, Cerberus tried to renegotiate a lower price for the deal or just walk away (after paying the $100 million reverse break up fee) because it didn't "feel comfortable" hitting up its committed financing banks for the leveraged loans to fund the deal. (Uh, excuse me, but since when did any private equity shop worth its Park Avenue address give a flying fuck in a rolling donut what pain their financing banks had to endure to fulfill a financing commitment?) Cerberus didn't invoke a "material adverse effect" or MAC clause, which URI alleges would have been the only alternative under the merger agreement which would have allowed Cerberus to repudiate the deal and pay the break up fee. In fact, URI alleges Feinberg and his associates specifically denied that an MAE had occurred when they were asked.

Of course, we have only heard the girl's side of this story to date, and we all know that Cerberus must have some sort of defense for its behavior. Unlike most "he said, she said" situations in real life, however, there is an actual legal document in this case which governs the parties' allowed behavior. According to a Bloomberg story today, Cerberus told the SEC "that it intentionally negotiated a higher price [for the deal] in order to include an 'out clause' that would allow the firm to walk away by paying the $100 million fee," so presumably it thinks there is language in the contract which supports its position. Only time—and the Delaware Chancery Court—will tell. I for one will hang on the outcome like a disease.

In the meantime, you, I, and the financial media will wait with bated breath for the details of this sordid affair to meet the light of day. Was Cerberus simply stupid, or was it trying to show its limited partners and its financing banks that hey, it tried to get out of an unfavorable purchase contract, but those nasty Delaware Court judges just wouldn't cut it any slack?

That would be a new approach: fiduciary out by reason of legal incompetence.

Wednesday, November 14, 2007

And then, one Thursday, nearly two thousand years after one man had been nailed to a tree for saying how great it would be to be nice to people for a change, one girl sitting on her own in a small café in Rickmansworth suddenly realized what it was that had been going wrong all this time, and she finally knew how the world could be made a good and happy place. This time it was right, it would work, and no one would have to get nailed to anything.

Sadly, however, before she could get to a phone to tell anyone about it, a terribly stupid catastrophe occurred, and the idea was lost forever.

This is not her story.

— Douglas Adams, The Hitchhiker's Guide to the Galaxy

Where are the Vogons when you need them?

* * *

I was thrilled to find out today that the bright bulbs at Pardus Capital have discovered how to make the world a good and happy place, and—unlike Mr. Adams' unfortunate girl in Rickmansworth—they were actually able to make it to a telephone (or an e-mail server) to communicate it before anyone obliterated the planet to make way for an interstellar bypass.

Their world-changing idea—in case you missed the public notice in the media today—is to effect a no-premium stock-for-stock merger of equals between Delta Air Lines and United Airlines. By way of this impressively clever and original mechanism, Pardus proposes to eliminate vast cartloads of duplicative costs ($585 million, to be exact) and put the merged airline on the path to prosperity in an age of rising fuel prices and looming Democratic re-regulation. Implicit in this strategic thunderbolt I can only assume there must be additional benefits, as well, such as the eventual recovery of pricing power by pathetic hub-and-spoke carriers, fresh pillows and mints for every economy class passenger, and the permanent global eradication of jock itch. Left unstated in the press release is whether anyone will need to be nailed to a tree or any other wooden structure to effect this revolutionary outcome, but I suppose we must take it on faith that our intrepid Pardusians have thought of this, as well.

"Damn!," you exclaim, "Why hasn't anyone else come up with such a brilliant and simple idea?" Good question. I guess the legions of M&A and corporate finance bankers plying their trade in the aviation sector over the past several decades just didn't have the intellectual firepower or sheer visionary drive of Pardus principals Karim Samii and Shane Larson. Either that, or they were too busy picking lint out of their collective belly buttons to notice a brilliant idea like this when it trotted up and pissed on their shoes. Who knows?

On behalf of my fellow investment bankers, I must humbly accept this rebuke for having had our collective thumbs up our asses for so long and express my sincere thanks to our hedge fund brethren for having so gently shown us the error of our ways. I confess that I, too, was ignorant of the fact that the firmament had been graced with the shooting star that is Pardus, but I am profoundly grateful that Mr. Samii was not content to rest upon the laurels of "a successful career at the investment firm W. R. Huff of Morristown, N.J." but rather chose to illuminate our pathetic fumblings with the radiance of his intellect.

Now, a cynic and a caviller might object to our heroes' proposal with a laundry list of the usual objections to airline mergers (chief among them the rather intransigent sticking point of how you merge employee seniority lists between pilots and flight attendants at two different airlines into one happy, cohesive family who are delighted—simply delighted, I tell you—to deliver improved customer service to a planeload of $49 passengers from Detroit to Orlando), but I for one will resist such negativity. After all, Messrs. Samii and Larson have correctly identified the looming threats of permanently higher fuel prices and crushing structural debt as problems desperately in need of a solution, and who are we to object to the patently obvious answer of merger and cost-cutting they lay before our dazzled eyes?

Others might say that the legacy airline business typified by carriers such as Delta and United is doomed to stumble along ad nauseum until public outcry breaks down the political and regulatory barriers to consolidation by merger or liquidation, but this is nothing more than unhelpful pessimism. Sure, both Democrats and Republicans have been diligent in preventing meaningful consolidation through cross-border mergers (no "foreign person" can own more than 25% of the voting stock of any US carrier), intra-US combinations (viz. the damp squib that was USAirways/United), or even the judicious application of Chapter 7 liquidation to the zombie air carriers who seem to revisit bankruptcy every few years or so, but we must understand that all those distinguished grey-haired pilots and curvy stewardesses wield a pretty mean lobbying stick. Furthermore, no Congressman worth his or her salt wants to preside over the (arguably necessary) destruction of (tens of) thousands of excess jobs in the name of economic rationality. After all, how can you serve the public good if you cannot get re-elected?

Besides, we know the Pardus Capital gang have already thought through all these trivial issues. After all, they spent a tidy chunk of their limited partners' capital on hiring both Gordon Bethune and SH&E to give them the answers they wanted to hear. They even went so far as to pro forma Continental's and Northwest's numbers into a two-page merger model with Delta, but their grizzled industry experts waived them away from the apparently greater cost savings of the latter and the "difficult management succession issues" of the former as non-starters. Whew. I'm glad those are out of the way.

And we know that Pardus is serious. A hundred and forty million dollars serious. They just added four million shares to their now-seven million share holding in Delta, so their interests are fully aligned with those of the rest of us widows and orphans who have a soft spot for legacy air carriers headquartered in Atlanta. Not for them to talk up the Delta shares just so they can trade out of the tar baby they just stumbled into, no sir.

So, in that spirit, I am offering my M&A advisory services to Pardus to help them effect the industry-transforming merger they have proposed. I suggest a modest success fee of $75 million if we succeed, and a "Sorry, better luck next time" pat on the back if we don't. Being successful hedge fund guys themselves, they should understand that kind of "trader's option" incentive structure perfectly well.

Thursday, November 8, 2007

Well, Percy Walker has taken his marbles and gone home. We citizens of the blogosphere are the poorer for it. (Approximately $10.4 billion poorer, if you take Ol' Perce at his word.)

This is a bad thing, in my opinion. Percy was "the world's foremost authority on the proper tax treatment of carried interest," in his own words, and it is always a great loss to the public weal when the leading theorist on a contentious social issue is forced to leave the field due to a few overzealous Spitzer wannabes. I would much rather have watched Percy and Vic "Carrot Top" Fleischer continue to mud wrestle over the issue and bite the occasional chunk out of each other's ear lobe. Everybody loves a good fight.

I suppose it is a sign of the maturation of the issue of private equity taxation that things have taken such a turn. Realizing that the private equity industry has no more than three actual friends on Capitol Hill (out of a total of 54 lobbyists and six dogs), Carlyle's David Rubenstein has dropped his previous strategy of wrapping Henry Kravis in the American Flag and wearing a lapel pin made out of apple pie in favor of pointing out that any tax targeted at carried interest will gore a great number of oxen that have no relationship to picayune plutocrats with Rod Stewart fetishes; namely, oil and gas and real estate. And everyone knows that we can't even look sideways at Real Estate nowadays without having the poor wretch burst into tears.

Vigorous theoretical defenses of the indefensible and scathing ad hominem attacks on your enemies simply no longer cut it in this Brave New Corporatized World of private equity. Christ, Rubenstein talked so much about "global brands" at the Deal M&A conference this week he began to sound like a Procter & Gamble ad manager. Plain speaking pioneers like Percy Walker are being frogmarched into retirement by weasely image consultants and PR specialists who are less interested in the truth than in soaking the previously principled PE firms for all they are worth.

Not that I agreed with Percy, mind you. I have no prouder trophy than Percy's blog post anointing me as one of his "Private Equity Haters." (You wouldn't believe how expensive and dangerous it is to bronze an entire computer while it is logged onto the internet, but I did it.) A great man is largely defined by the power and influence of his enemies. By that token, I am officially a Bad Ass.

Anyway, wipe away a tear for the passing of a great man. And pay absolutely no attention to those scurrilous rumors that Percy has eloped with sardonic memoirist Equity Private of PE fan site Going Private. While it is true that She Who Must Be Obeyed has been missing in action for over a month, I know for a fact that there is no truth to the rumor that she has been personally preparing a leafy love nest on a deserted Tahitian island in advance of Percy's arrival. Like all good private equity professionals, she outsourced it.

Wednesday, November 7, 2007

Once again, I am sorry for any disappointment I may have caused my Faithful Readers for another extended absence, but I have been busy trying to persuade some Europeans and other unwashed furriners to use their ridiculously inflated currency to put a number of my US clients out of their undercapitalized misery. Attention K-mart shoppers, Blue Light Special in Aisle 3: Corporate America! Of course, being the upstanding patriot you know me to be, I refuse to accept payment of my fees in anything other than small-denomination pound notes, FOB the Isle of Man.

Anyway, in between moving assets frantically off shore, I dropped by The Deal's 2008 M&A Outlook conference in New Amsterdam today for a few giggles. A marquee list of the Great & Good—along with the usual admixture of shills and sponsors—trotted out the usual platitudes about the M&A market and its imminent climb to $50 trillion in volume any month now. A few people distinguished themselves by not making complete and utter fools of themselves, but it is against my policy to praise competitors in public, so I won't.

The highlight of the program for me was the triple billing of Bruce Wasserstein, Marty Lipton, and Leon Black, who did a creditable job of talking past each other in a very deferential and collegial manner. So polished was their family juggling act—Uncle Brucie, Grampa Martin, and precocious Little Leon—that they might want to consider the circus should credit armageddon or a Democratic Administration truly shut down the merger game for good.

For such a large bear of a man, Leon Black constantly surprises me when he opens his mouth to release a little, high-pitched voice more suited in my view to a prepubescent teen. That being said, there are plenty of squeaky voiced terrors out there with proven ability to kick my ass from here to Sunday—including Mike Tyson and David Beckham—so I never make fun of him to his face. Marty Lipton laid on the Grampa Munster act a bit thick, but knowing him he probably did it to keep the audience off balance for some devious ulterior motive of his own.

Bruce was another story. I don't know about you, Dear Reader, but I often scratch my head over the success and prominence of people at the pinnacle of my industry. I have met most of them, I have worked with and against them, and I usually can't see why they made it to the top of the slippery pole over dozens of other investment bankers with just as much apparent talent and ambition. Usually I just put it down to an over-developed Napoleon complex and leave it at that. I had not run across Bruce myself for several years, so I suppose I had slipped into thinking his ascent to his lofty, well-compensated perch was due primarily to a finely tuned talent for politics and some efficient knife work in a back alley.

But hearing him again in person reminded me of the impression he has made on me several times in the past. The man can talk. And by that, I do not mean the content of his speech, or the brilliance of his insights (which were middling). I mean his voice. For his voice is Bruce Wasserstein's true instrument, and he plays it like a master. It is persuasive, dynamic, melodious, and insinuating, with a noticeable throb and catch that cries out for his listeners to say, "Yes, yes! What that man is saying makes perfect sense. He is so ... reasonable." I always laughed when I heard him described as "Bid 'em up Bruce," but today I was reminded why he usually succeeded in advising his hardheaded clients to go for the gusto. They just curled up in a ball and purred, "Sure, Bruce, whatever you say. Just keep talking."

So with that in mind I offer up some free casting advice for Oliver Stone or whatever director decides to produce Bruce Wasserstein's life story: cast John Malkovich in the title role. The voice match is almost perfect—although Bruce actually has a lower register—and a little less hair and a little more tan would make Malkovich an almost perfect match in appearance. (Bruce has lost a lot of weight in the past six months or so.)

Besides, Malkovich the actor—whom I also admire—is in some deep, elemental way profoundly disturbing. Who better to play the Pied Piper of M&A?